One million nine hundred and seventy-five thousand dollars.  Those are the fees applied for by the lawyers representing the Plaintiff in the almost completely unsuccessful effort to get an injunction against the now completed merger between Wachovia and Wells Fargo. 

Plaintiff has presented a Stipulation and Agreement of Compromise, Settlement and Release to the Court, which includes a provision for the $1.975 million fee award.  Wells Fargo, the acquiror of Wachovia, is not opposing Plaintiff’s request.

What are Wachovia’s shareholders getting out of the proposed settlement in the Ehrenhaus v. Baker lawsuit?  Not money.  The merger closed, months ago, at the price offered by Wells Fargo and on Wells Fargo’s terms, after the Business Court denied Plaintiff’s Motion for Preliminary Injunction.

The only arguable "value" for the Wachovia shareholders obtained by the Plaintiff consists of two things.  The first is that Judge Diaz’ December 5, 2008 Order held invalid an 18-month "tail" on Wells Fargo’s right to vote its 40% interest in Wachovia if the merger wasn’t approved.  After that, Plaintiff filed a Proposed Amended Complaint asserting proxy violations.  Although that amendment has never been allowed by the Court, Wachovia made amendments to the Proxy Statement six days after the Proposed Amended Complaint was filed.

The information added by Wachovia to its Proxy Statement was (to me, anyway) completely inconsequential.  If you want to make the comparison yourself, the November 21, 2008 proxy statement is here, and the December 17, 2008 8-K filing containing the supplementation is here.

The Brief filed by Plaintiff in support of the settlement doesn’t contain any mention of a legal basis for an award of attorneys’ fees.  That might be because there isn’t any basis for such an award.  The North Carolina Court of Appeals has held that class counsel is not entitled to fees unless the relief obtained involves some pecuniary benefit to the class. 

That case, coincidentally, also involved Wachovia, and is In re Wachovia Shareholders Litigation, 168 N.C. App. 135, 607 S.E.2d 48 (2005).  That decision overturned an award of fees to class plaintiffs who got relief similar to the invalidation of the tail in the Ehrenhaus case.  So if Wachovia and Wells Fargo opposed a fee petition, it seems almost beyond doubt that they would win, because Plaintiff didn’t obtain any monetary benefit for the class.

If the Business Court is going to be willing to consider fees notwithstanding the roadblock of the In re Wachovia Shareholders case, there isn’t a bit of explanation in any of the papers filed this week about why counsel should be entitled to $1,975,000.  Nothing about hourly rates, nothing about the number of lawyers who worked on the case, nothing about the work they did, nothing about their out-of-pocket expenses, and no connection between the $1,975,000 and the value of the results achieved for Wachovia’s shareholders. (Though the Plaintiff’s lawyers did point out that they reviewed 9,500 pages of documents and they took four depositions.)

That’s a pretty glaring omission, because there’s no information for the Court to enable it to assess the reasonableness of the attorneys’ fees. That’s a requirement of the approval of a class action settlement, certainly under federal law. See, e.g., Piambino v. Bailey, 610 F.2d 1306, 1328 (5th Cir.) (holding that by summarily approving attorney’s fees in an unopposed settlement agreement the district court "abdicated its responsibility to assess the reasonableness of the attorneys’ fees proposed under the settlement of a class action, and its approval of the settlement must be reversed on this ground alone."), cert. denied, 449 U.S. 1011, 101 S.Ct. 568, 66 L.Ed.2d 469 (1980); Jordan v. Mark IV Hair Styles, Inc., 806 F.2d 695, 697 (6th Cir. 1986)("Even where there has been no objection to the size of the attorney’s fee requested, it is the responsibility of the court to see to it that the size of the award is reasonable.").

Wachovia shareholders who are members of the class will have the right, at a time set by the Court, to object to the terms of the proposed settlement.  By the way, this is proposed to be a non-opt out class of shareholders, which means that the settlement will cover every shareholder of Wachovia. Plaintiff says that’s appropriate because this was a "typical merger case" where the claims were "predominately equitable in nature." 

After a case is designated to the Business Court, the Clerk of Court in the county in which the case is pending no longer has the authority to grant a motion for extension of time.  In this case, per Business Court Rule 9.2, the Court struck the Order entered by the Clerk granting an extension of time and directed the party to re-file a motion in compliance with the rules of the Court.

Order

The Fourth Circuit today settled a nationwide debate, in this Circuit anyway, about an important issue involving automobile loans in Chapter 13 proceedings.  That’s whether a lender can have a purchase money security interest for the portion of its financing which includes "negative equity" or other items associated with the loan, like "gap insurance." 

The answer, according to the Fourth Circuit in the case of In re Price, is "yes."  The case drew amicus briefs from a group of bankruptcy law professors, the National Association of Consumer Bankruptcy Attorneys, and GMAC; and was argued for the creditors by noted bankruptcy lawyer and former Professor David Epstein.

This issue arises when a borrower who owes money on the car that he or she is trading in rolls the amount of the unpaid debt (the negative equity) into the loan for the new car.  An "upside down" borrower like this also has to take gap insurance for the loan.  That’s additional insurance covering the difference between the amount owed and the amount that would be paid if the car were totaled, because the lender is lending more than the car is worth.  According to the Fourth Circuit, this type of borrowing is involved in about 38% of new car loans. 

The financing of this additional debt becomes important in a Chapter 13 proceeding, because a Chapter 13 debtor has to repay in full a creditor’s "allowed secured claim."  That ordinarily is the present value of the collateral, and that is often less than the loan amount.  So in the non-car loan situation, this results in a bifurcation of a Chapter 13 creditor’s claim into two components — a secured claim for the value of the collateral, and an unsecured claim for the remainder.

But in 2005 Congress added something called the "hanging paragraph" to the Bankruptcy Code, which the Fourth Circuit said was designed "to protect secured car lenders." The hanging paragraph, at the end of 11 U.S.C. §1325(a), says that there won’t be bifurcation if the claimant has a purchase money security interest involving a motor vehicle. 

This statutory addition has resulted in a variety of different results in courts around the country:

  • Some courts have held that a lender is entitled to a purchase money security interest in the entire amount of the car loan, even if the lender financed negative equity and gap insurance.
  • Other courts hold that a lender can’t have a purchase money security interest in the portion of a car loan relating to negative equity or gap insurance. 
  • Then, some of these courts apply the "transformation rule," and treat the entire debt as non-purchase money if it includes any negative equity.
  • Other courts apply the "dual status rule," which grants the lender a purchase money security interest for the portion of the claim that doesn’t include negative equity and an unsecured claim for the remainder.

The Fourth Circuit took the side of the lenders on this one, looking to the Uniform Commercial Code definition of "purchase money security interest," and holding that "negative equity financing gives rise to a purchase money security interest under the UCC — and, thus, under the hanging paragraph as well." 

The Court held that the debtors "could not have traded in their old car unless they also extinguished their negative equity; car dealers are generally unwilling to accept a trade-in with an outstanding lien because the lien makes it difficult for the dealer to resell the car."  It rejected arguments of amici that this result would "make it more difficult for the chapter 13 debtor to retain his or her car" in the bankruptcy proceeding.

The result reached by the Fourth Circuit is consistent with an Eleventh Circuit decision, In re Graupner, 537 F.3d 1295 (11th Cir. 2008).

When a member leaves an LLC, whether his or her departure is a withdrawal or a dissolution can make a significant difference.  In this case, the characterization of the nature of the Plaintiffs’ departure from a law firm LLC determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

If a dissolution had occurred, Plaintiffs’ rights were governed by N.C. Gen. Stat. §§57C-6-04(b) and 57C-6-05(3), which said that the law firm would continue in existence and that its managers would be obligated to obtain "as promptly as reasonably possible. . . the fair market value for the [LLC’s] assets" and to distribute the recovery to the members of the LLC.  That interpretation might have yielded a significant distribution from the in-process contingent fee cases.

But if the actions of the Plaintiffs constituted a "withdrawal," the Plaintiffs’ rights would be governed by N.C. Gen. Stat. §57C-05-07, and their final distributions would be limited to the fair value of their interest in the firm as of the date of withdrawal.  The value of the contingent fee cases was potentially nothing under this analysis.

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  There was none in this case   It rejected Defendants’ arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

The Court nevertheless ruled that Plaintiffs were estopped from disputing that they had withdrawn from the LLC.  Judge Jolly held that estoppel is "kaleidoscopic," that it could arise "by conduct, deed, or misrepresentation," and that estoppel "is viewed as ‘flexible’ in its application." 

The factors he considered in concluding that estoppel applied were (a) the Plaintiff’s oral and written representations that they intended to withdraw, including one Plaintiff’s statement "I am out of here," (b) the treatment by all parties of Plaintiffs’ departure as a withdrawal, (c) the Plaintiffs’ formation of their own firm, (d) Defendants’ detrimental reliance on Plaintiffs’ representations of withdrawal, and (e) Plaintiffs’ silence "on the pivotal issue [of whether there had been a dissolution or a withdrawal] for approximately one year."

The Court rejected Plaintiffs’ arguments that they could not have withdrawn because they "did not appreciate the distinction between withdrawal and dissolution" at the time they left the firm.  Judge Jolly said that "when they unilaterally chose to leave the Firm, and characterized their leaving as a ‘withdrawal,’ the Plaintiffs were charged with knowledge of the consequences of their actions; and Defendants were entitled to rely and act upon those actions."

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

This case involves sanctions under Rule 26(g) of the North Carolina Rules of Civil Procedure, which provides that an attorney’s signature on a discovery response is a certification that it is "consistent with the rules," and "not interposed for any improper purpose," and "not unreasonable or unduly burdensome or expensive."

The Court determined that sanctions under Rule 26(g) are mandatory in the event of a violation, and that Rule 11 cases don’t have much relevance in a Rule 26(g) sanctions motion.

Plaintiff was sanctioned because its counsel had (1) designated one person (Wagner) as an expert "without an intention of having  Wagner prepare any expert report containing his opinions and the basis therefore, (2) failing to make inquiry into Wagner’s qualifications to give any expert opinions, and (3) designating [another witness, Tarr] as an expert without even having communicated with Tarr." Op. ¶28.

Lawyers have a duty to cooperate in discovery in complex cases. Forthright discovery is particularly important, said Judge Tennille, when expert discovery is involved.  He held that "[o]ur rules are designed to flush out what opinions are going to be expressed at trial so that challenges to those opinions can be heard pretrial without wasting the jurors’ time. Responses to discovery that comply with the rules save the parties and the courts substantial time and money." Op. ¶13.

Another factor leading to sanctions was Plaintiff’s counsel refusal to discuss matters with Defendant’s counsel.  Judge Tennille said that ""[l]awyers have a responsibility and a duty to their clients, the Court, and opposing counsel to communicate openly and civilly with each other. A failure to do so is a breach of their professional duties and results in unnecessary delay and expense to the parties and the Court." Op. ¶32.

Full Opinion

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

The electronic filings on the Business Court website are public records, which the public has the right to inspect.  The Court’s power to place filings under seal, or to limit the public’s right of access, is permitted “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest.” (citing Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476,515 S.E.2d 675, 693 (1999).  There is no distinction between a record available online at the Court’s website or one available in a paper file at a county courthouse.

Full Opinion

 

A parent corporation can, under certain circumstances, be liable for the actions of its subsidiary under a conspiracy theory, notwithstanding the doctrine of intracorporate immunity.

This opinion summarizes prior law in North Carolina — consisting of six cases — addressing the doctrine of intracorporate immunity in the context of a claim for civil conspiracy under North Carolina law. 

The Court nevertheless dismissed the claim in this case, stating that 

"if plaintiffs were allowed to sue parent entities whenever the decision to cause a subsidiary to act in a certain manner originated with the parent, it ‘would increase litigation costs and deter the use of subsidiaries, even when there is a legitimate purpose for doing so and there is no wrong to others in being forced to look only to the subsidiary for relief.’"

The Court also dismissed an unfair and deceptive practices claim, even though Plaintiff had alleged that the Defendants had never intended to honor the contract at issue.  The Court said the Plaintiff had failed to allege any facts in its Complaint to support this assertion, and that it was "nothing more than an ‘unwarranted deduction[] of fact’ that the Court need not accept."

Judge Diaz also rejected other arguments by the Plaintiff that it said would support an unfair and deceptive practices claim, including arguments that (1) the Defendants had owed fiduciary duties to the Plaintiff, (2) the Defendants had "inequitably asserted their position of power over Plaintiff," and (3) the unilateral price increases amounted to conversion.

The Court ruled that there was nothing before it other than a breach of contract, and it relied on settled law that "a mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under" the unfair and deceptive practices statute. 

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

The Court rejected Plaintiff’s argument that a provision limiting its recovery of damages for breach of contract was an unenforceable penalty, ruling instead that this was a valid liquidated damages provision. 

The Court also found there to be a question of fact whether one of the Defendants had been a part of a joint venture, so that he could be personally bound under a contract even though he had not signed it.  The Court denied this Defendant’s statute of frauds argument on that basis, stating the following with regard to joint ventures:

{14}  A joint venture is “an association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business adventure for joint profit, for which purpose they combine their efforts, property, money, skill, and knowledge, but without creating a partnership in the legal or technical sense of the term.” Pike, 274 N.C. at 8, 161 S.E.2d at 460 (citing In re Simpson, 222 F. Supp. 904, 909 (M.D.N.C. 1963)). An express agreement is not required to prove the existence of a joint venture. See Rhue v. Rhue ___ N.C. App. ___, ___, 658 S.E.2d 52, 59 (2008); see also Wike v. Wike, 115 N.C. App. 139, 141, 445 S.E.2d 406, 407 (1994). Rather, intent to create a joint venture can be inferred by the conduct of the parties and the surrounding circumstances. See Rhue, ___ N.C. App. at ___, 658 S.E.2d at 59; see also Wike, 115 N.C. App. at 141, 445 S.E.2d at 407. The existence of a joint venture “may be based upon a rational consideration of the acts and declarations of the parties, warranting the inference that the parties understood that they were [co-adventurers] and acted as such.” Davis v. Davis, 58 N.C.App. 25, 30, 293 S.E.2d 268, 271 (1982) (citing Eggleston v. Eggleston, 228 N.C. 668, 674, 47 S.E. 2d 243, 247 (1948)). “Facts showing the joining of funds, property, or labor, in a common purpose . . . in which each has a right . . . to direct the conduct of the other[s] through a necessary fiduciary relation[ship]” is sufficient for finding the existence of a joint venture. Pike, 274 N.C. at 8, 161 S.E.2d at 460; Cheape v. Chapel Hill, 320 N.C. 549, 561, 359 S.E.2d 792, 799 (1987).

{15} In North Carolina, joint ventures are similar to partnerships, and they are “governed by substantially the same rules.” Jones v. Shoji, 336 N.C. 581, 585, 444 S.E.2d 203, 205 (1994). A hallmark of a partnership is the sharing of “any profits, income, expenses, joint business property or hav[ing] authority of any kind over each other.” Wilder v. Hobson, 101 N.C. App. 199, 203, 398 S.E.2d 625, 628 (1990).

In another opinion issued at the same time in the same case, the Court granted the motion for summary judgment of another Defendant (Allen) on the same grounds, finding that there was no genuine material issue of fact as to Allen’s lack of association with the claimed joint venture.  That opinion is Azalea Garden Board & Care v. Vanhoy, 2008 NCBC 7 (N.C. Super. Ct. March 17, 2009).

Full Opinion

Minority sharehoders did not have a "reasonable expectation" of continued employment after serious issues arose between them and the majority which rendered them unable to work together.

Those same shareholders did have enforceable reasonable expectations that their stock ownership interest would not be diluted, however, and the Court invalidated steps taken by the majority to improperly issue themselves more shares in the company.  

The Court held that the Defendants had been engaged in self-dealing through the transactions which diluted the ownership interest of the Plaintiffs.  It rejected the argument that the Defendants were entitled to the protection of N.C. Gen. Stat. §55-8-31(a), which allows for conflict of interest transactions under certain defined circumstances.

Given the receipt by the directors of a personal financial benefit from the transaction, the Court held that the directors were not entitled to the benefit of the Business Judgment Rule.  And in light of the self-dealing nature of the transaction, the burden of proof fell on the Defendant to prove that the transactions were fair, just, and reasonable. They were unable to carry that burden.

The Court ordered the dissolution of the Company, subject to the right of the Company to purchase the Plaintiffs’ shares at fair value.

Full Opinion

The Court ruled that the plaintiff could proceed with its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.  The agreement was therefore not an unenforceable agreement to agree.

Judge Tennille described the Agreement at issue and its attachments as "a very sophisticated business transaction among parties of equal knowledge negotiating at arms length," and said that "the extensive nature of the documentation left very few terms to be negotiated for each side."  Op. ¶ 19.It contained what the Judge referred to as "impasse provisions" which dealt with situations where the parties did not reach agreement.

He denied the Motion to Dismiss, holding:

The impasse provisions in . . . the Master Agreement do not require the Court to supply any material terms. . . . Unlike the JDH case, in which the Court is asked to supply terms missing from a written letter of intent, this case involves the enforcement of specific remedies provided for in the agreement itself.

Op. ¶¶ 33-34.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss